Nvidia stock soars on power of graphics chips

By Ian King

Updated 3:07 pm, Friday, December 30, 2016

Shares of Nvidia are once again moving higher on Thursday following yesterday's upgrade at Evercore ISI. The firm upgraded its rating on the shares to Buy from Hold, and set a price target at $120 as the firm projects another favorable year for AI-associated technologies in 2017. Nvidia's dominates the semiconductor space due to the diverse capabilities of its chips. On CNBC "Squawk on the Street" Wednesday, TheStreet's Jim Cramer said that chips are needed for machine learning, gaming and cars, and Nvidia has the "most sophisticated chips." Cramer continued to say people have to understand this is what Intel looked like in 1991, calling it the "Secretariat" of the semiconductors.
Video provided by TheStreet

Media: TheStreet

When Paulina Sliwinska, a fund manager at Baillie Gifford & Co., made the trip to Silicon Valley looking for the next big thing in technology, she found it — not in a hot startup run by a 23-year-old whiz kid just out of Stanford, but in a 23-year-old semiconductor maker that’s had the same chief executive officer since its founding.

Jen-Hsun Huang, CEO of graphics-chip maker Nvidia, has won over Sliwinska and many other investors this year with claims that his products, once confined to the niche of computer-gaming machines, are breaking out to become key components of nascent technologies from voice recognition to self-driving cars.

“He’s so engaging,” said Sliwinska. “Even from this point the opportunities in front of it over the next 10 years are astonishing.” After she met Huang in August, the fund added to its position and is now the 10th-largest holder. The company was the best performer on the Nasdaq 100 Stock Index this year, outpacing the No. 2 stock by a multiple of almost three.

Under Huang, Nvidia has built itself into the leading supplier of graphics processors, the chips that deliver the ever-more-realistic images that make computer games so immersive and addictive. For most of its history, that’s been a relatively small market, with the much bigger businesses of computer processors and smartphone chips dominated by Intel and Qualcomm.

This year, though, Huang’s longtime belief that the fundamental advantages of his graphics chips would give them a broader role in fast-growing fields such as artificial intelligence and self-driving cars has begun to pay off — and is buoying Nvidia’s earnings. In the third quarter, demand for chips used in data centers and cars helped fuel a 54 percent rise in sales, and profit doubled to a record.

That performance was the result of years of investment in the hardware and software that enables computers and cars to think for themselves, according to Huang. The stock rose 30 percent on Nov. 11, the day after the earnings report. Yet there was no victory lap from the CEO — his company is going to battle in markets served by Intel, whose annual research and development spending is twice Nvidia’s revenue, and Qualcomm, which has the largest cash balance in the chip industry.

“The only thing we can guarantee is the velocity with which we innovate,” Huang said at the time. Nvidia declined to make Huang available for comment for this story.

Huang runs Nvidia like it’s still a startup, making snap decisions and demanding fast execution, according to those who have worked for him. For a semiconductor maker, that’s no small feat: Designing a chip, getting it ready for market and then having it manufactured can take years and costs hundreds of millions of dollars. Chip companies publish road maps that reflect those intricate details, and they build their organizations around it. Decisions on what to make in multibillion-dollar plants requires extensive planning.

At Nvidia, things can happen a lot faster. In the space of a short meeting hosted by Huang, an executive trying to give an update on progress of a new chip design might find himself silenced as Huang calls an engineer to check on a technical question — then instantly decide that the project is dead or make the call to head in a different direction.

Huang has long clung to the belief that graphics chips would play a key role in technological innovation. But past efforts to spread their use, such as in phones, have failed to catch on or taken a lot longer to deliver tangible results.

While the annual advent of a new high-end GeForce chip from Nvidia has long been viewed as a gift from above for computer gamers — many of whom think nothing of paying more for one component than most ordinary users would for a whole computer — Nvidia as a company had been less revered until this year. Its stock has struggled to rise higher than $35 in the 17 years since it first went public. Friday, the shares closed at $106.74.

Some investors and analysts who follow Nvidia the most closely missed cashing in on the stock. The reason: They’ve heard Huang’s pitches before and initially wrote off his predictions about artificial intelligence and self-driving cars as no different from previous forays that fizzled.

“Jen-Hsun didn’t dial it up or dial it down — he was just as enthusiastic about the automotive opportunity as he was for Tegra,” said Ian Ing, an analyst at MKM Partners, referring to the company’s mobile phone chip announced in 2008.

The Tegra line of chips was Nvidia’s attempt to get into smartphones, which Huang correctly pointed out were on the cusp of transforming computing and communication. Yet because he and others underestimated the importance of an integrated cellular connection, Nvidia’s offering failed to win significant business.

Unlike other companies that lost out to Qualcomm, Huang didn’t close down the project — instead Nvidia fielded its own game console, called Shield, as a way to try to create a market for Tegra and showcase its abilities to potential customers. While Shield never challenged the dominance of Xbox or PlayStation, the product led to orders for Tegra from Nintendo, which made the chip the heart of one its new game systems.

“It was more or less a science project internal to Nvidia, and now Nintendo has adopted it,” said Kevin Cassidy, an analyst at Stifel Nicolaus. “That’s another example of them pulling themselves up by their bootstraps, creating a market and then giving it to their customer.”

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